WHAT HAPPENED IN JANUARY?

INFLATION HITS A 20-YEAR HIGH

COUNTRIES that previously lowered the interest rate and eased the monetary policy to fight against increasing inflation, have got in an exact opposite circle. Some have started to decrease monetary easing; others have started to hike the interest rate. Turkey, meanwhile, reduced the real interest rate to negative by lowering the policy rate below inflation in this period when other countries have started to implement tight monetary policy.

Annual inflation rose to 36.1% and the Consumer Price Index (CPI) surged by 13.6% in December 2021, according to the data announced at the beginning of January. The domestic producer price index (D-PPI), which monthly rose by 19.1% reached 79.9% on an annual basis. The monthly inflation has seen the highest level since 1994 and the annual inflation has reached the highest level since 2001.

There are two reasons behind the high inflation: The price surge stemmed from the foreign exchange (FX) rate hike caused by demand increase in FX due to the decline of the real interest rate to the negative and global price increase. As long as the real interest rate remains negative, there won’t be a serious strengthening in residents’ and foreigners’ tendency to invest in some instruments with TRY interest rate, and the FX rate increase will continue albeit slowly. Moreover, the high price increase in the fields such as energy, transportation, and taxes in December 2021 and January, will raise prices in other sectors. On the other hand, the difference between CPI and D -PPI, which hit a historic high is a factor that makes consumer prices difficult to decrease. That’s why inflation will maintain the existing course at least in the first half (H1) of the year.

DETERIORATION CONTINUES IN INFLATION EXPECTATIONS

THE CENTRAL BANK released the Survey of Market Participants at the beginning of January.

Here are the results:

- The CPI expectation for January is 6.5%

- The year-end CPI expectation is 29.8% for 2022 (It was 23.9% in the previous survey)

- The year-end USD/TRY expectation is 16.13 (It was 13.77% in the previous survey)

- The policy rate expectation is 14% for the next three months

Inflation expectations of market participants continue to deteriorate. The growth is expected to slow, and the current account deficit is expected to contract. Deterioration in inflation expectations poses a risk not only in terms of the continuation of the price surge but also in terms of deterioration in pricing behaviors and dollarization. The Central Bank raised the year-end inflation forecast from 11.8% to 23.2% for 2022 in the first Inflation Report of the year that was released on January 27. The bank also announced that a new strategy with ‘liraization’ name has been started to prevent dollarization in the economy.

JANUARY INFLATION AT 20-YEAR HIGHT

THE TURKISH STATISTICAL INSTITUTE (Turk Stat) announced January inflation numbers on February 3. After the consumer inflation reached 36% in December, it was obvious that the January data would be even higher, especially due to the hikes in electricity, natural gas and fuel, as well as cigarettes and alcohol products. And that’s what happened.

• Accordingly, monthly inflation is 11.1% for consumer prices and 10.4% for producer prices

• Annual inflation jumped to 48.7% for consumer prices and 93.5% for producer prices.

We have reached a level that we have not seen since January 2002 in consumer inflation.

PMI ENDS 2021 WITH A RISE, EASES DOWN IN JANUARY

THE PMI INDEX, which is one of the critical indices for industrial production and growth, ended 2021 at 52.1. The data, which was released at the beginning of January showed that growth in the manufacturing industry continued. The index, which fell below 50 only in May, gained value towards growth in the remaining 11 months in 2021. On the other hand, it has continued to be above 50 for the seven successive months.

In January, although the index fell to 50.5, the lowest level of the last eight months, it remained slightly above the 50 point threshold.

The PMI survey measures activities in ten main sectors under different headings. The headline value of 50.5 points covers all of these sectors. However, when we look at the PMI data by sector, we see that only four of the ten sectors have a value above 50.

The four sectors that grew in January were clothing and leather, non-metallic minerals, chemistry-plastics, and vehicle production. On the other hand, the food, textile, wood and paper, basic metal, machinery, and electric-electronic sectors shrank in value.

In production, which we can consider as the most important component of PMI, we see that there is an increase in the production of only one sector (chemistry-plastics) and a decrease in production in all other sectors. The sector whose production declined the most is non-metallic minerals. Additionally, there has been a rapid slowdown in textiles and electrical-electronics.

The contraction in most of the sectors is noticeable in new orders as well. While there is an increase in total orders in the clothing and leather, as well as the chemical and plastic sectors, there is a loss in all other sectors. Non-metallic minerals and machinery are the two sectors where orders have decreased the most. The decline in minerals has been long ongoing, but the machinery sector orders have only been falling for the last two months.

Although export orders generally paint a better picture than orders, there is a loss of strength here as well. Export orders for four sectors increased in value, while six of them decreased. The sectors with increasing export orders are clothing, wood and paper, chemicals, and non-metallic minerals. Although this is a positive indicator, we should not forget that their share in overall exports is limited.

Contrary to all other indicators, employment is positive in seven out of ten sectors. Employment continues to increase in sectors excluding textiles, clothing and leather, and non-metallic minerals. Moreover, the employment indicator in general has been increasing for 20 months.

The PMI is calculated by weighing five separate sub-indices: New Orders (30%), Production (25%), Employment (20%), Suppliers Lead Time (15%), and Input Purchases (10%). Supplier lead time is under 50 across all industries. Input stock is also in a state of contraction in all sectors except vehicles.

Therefore, the fact that the PMI for January was above 50 is largely due to the effect of positive employment. However, it should not be overlooked that employment is an indicator that reacts later than others to negative developments in the economy.

INDUSTRIAL PRODUCTION CONTINUED TO RISE IN NOVEMBER

THE STRONG increase continued in industrial production in parallel with PMI. The November data showed that the calendar-adjusted industrial production index rose by 11.4% on an annual basis. Thus, the manufacturing side showed growth in the first 11 months of 2021. The industrial production index, which averaged 113.2 in the first 11 months of 2020, averaged 133.5 in the same period of 2021. The index nearly surged by 18% in this period.

BUDGET DEFICIT BELOW EXPECTATIONS

BUDGET expenditures were above the initial target by 18.8% and reached TRY 1.59tr, while budget revenues were 27.8% above the target and totaled TRY 1.4tr in 2021. Thus, the budget deficit was 9.7% below the target of TRY 244.9bn and amounted to TRY 192.2bn.

Revenues in all tax items excluding the Special Consumption Tax (SCT) exceeded the target. Increasing inflation was the most important reason behind the surge in tax revenues. Moreover, the Value-Added Tax (VAT) revenues significantly increased after e-commerce jumped and full opening triggered delayed demand. VAT revenues climbed by 72.5% in 2021 compared to the budget beginning estimations. SCT revenues remained below the beginning forecasts of the budget as SCT was reduced to zero in some period in line with the fuel price surge.

The target of the ratio of budget deficit to GDP (Gross Domestic Product) was set as 3.5%, according to the Medium-Term Economic Program (OVP). We’ll see the exact ratio after a while as the growth data hasn’t become clear yet. However, we’ll see it below the target.

CONSTRUCTION COST INDEX HITS THE TOP

THE CONSTRUCTION COST INDEX, which monthly increased by 8%, climbed by 48.9% to 348.5 points in November year-on-year. This means that costs rose to 348.5 in November 2021 if the costs are considered as 100 in 2015. Construction costs are gathered under two titles by the Turkish Statistical Institute (TurkStat): material costs and labor costs. Material costs naturally take the lion’s share.

A large part of the recent cost increase has stemmed from the surge in material prices. The November data shows that the material index jumped 60.1% and the labor index rose by 22.5%.

Inputs such as cement, iron, aluminum, and glass, whose prices are directly affected by FX rate or production becomes more expensive due to increasing energy costs, play a big role in construction costs.

We’ll see another peak in material cost increase when the December data is released. In the January data, labor costs will peak due to wage increases. The index can be expected to hover around 400 in February.

HOUSE SALES MOVE TOWARDS RECORD

HOUSE SALES exceeded 226,000 units in December. This has been the second month with the highest monthly house sales to date. House sales were high in June and July 2020 with the impact of the delayed demand due to the pandemic. However, we observe an increase in house sales without such an impact in December.

Both new and secondhand house sales significantly increased in December. However, the increase in secondhand houses draws attention. The demand for second-hand houses decreases the new-second hand price difference. Many factors support house sales. The fact that the price hike transforms houses into an investment instrument seems more dominant among them.

On the other hand, the annual total house sales, which saw 1.49 million, slightly remained below the 2020 figure. However, house sales have been above the previous years in Turkey for the last two years. 2021, when more than 58,000 homes were sold to foreigners, was a peak year in this sense.

EXPORTS AND IMPORTS BROKE A RECORD IN 2021:

Exports rose by 32.9% to USD 225.4bn

Imports increased by 23.6% to USD 271.3bn

Foreign trade deficit decreased by 7.8% to USD 46bn.

Turkey’s exports did not only hit an all-time high but also showed slightly faster growth than total global trade that has boomed. Four main reasons behind the export increase are as follows:

1- Global economic growth

2- Surge in global commodity prices

3- Deterioration in supply chains in favor of Turkey

4- Exporters’ promotion and market penetration activities

Apart from exports, imports also hit an all-time high in 2021. Moreover, we reached such an import level despite the sharp decline in gold exports and FX rate hike in the last four months of the year. Turkey, which imported USD 26.6bn gold in 2020, imported USD 7bn gold in 2021. We observed a reducing impact of nearly USD 20bn that stemmed from gold alone. Despite this, imports rose by 23.6%. Excluding gold, the import increase hovers around 37% and is above the export increase.

January data announced on February 2 points to a development that we have not witnessed for a long time. • Exports have reached USD 17.6bn, with a 17.1% increase.

• Imports reached USD 28bn, with an increase of 55%.

While it is highlighted that exports broke a record on many different media channels, it is not mentioned that imports increased three times faster, breaking another record.

Although exports and imports generally move parallel to each other in Turkey’s foreign trade; sometimes one changes faster than the other. We have not seen data like this for a long time. The difference between import growth rate (55%) and export growth rate (17%) reached its highest level since 2000, in favor of imports. The basis of this jump in imports is energy imports, which increased by 240%.

MPC ON STANDBY MODE

ONE of the most anticipated developments in January was the Central Bank’s interest rate decision. In the September-December period, it was reduced from 19% to 14%. When the policy rate was reduced by 5 points from September to December, inflation increased by 16 points.

Emphasizing inflation and tight monetary policy in all statements made until September, the CBRT changed its tune in the final months of 2021. There was no indication that the attitude exhibited since September continued

or changed during the rise in the foreign exchange rate in November and December and the improvement process observed since December 21. However, those who participated in the market participants’ survey before the decision did not expect a new discount. The result was in line with expectations - the Monetary Policy Committee kept interest rates constant.

CONSUMER CONFIDENCE STARTS 2022 WITH A RISE

CONSUMER CONFIDENCE, which reached its highest value in 2021 (86.7) during the administration of former CBRT President Naci Agbal, fell in six of the following eight months. There were a number of factors that could have led the index, which was at a record low of 68.9 in December, to be lower or higher in January data. The price hikes and the inflation index, which broke the record of the last 20 years, had a suppressing effect on the index, while wage increases and the decreasing tension in the exchange rates had an upward effect. The second of these prevailed the consumer confidence index rose to 73.2 points.

GLOBAL WINDS ARE AGAINST US

THE GLOBAL MARKETS have had an uncertain start to 2022. There was a horizontal and slightly positive trend in the markets in the first two weeks of January. Sales made in the stock markets pulled the indices to the support levels in the second half. Technology stocks fell and many cryptocurrencies have experienced very sharp declines. Bitcoin, which was USD 68,000 in November, has rebounded slightly after falling to USD 33,000 at the end of January. Uncertainty regarding the speed and severity of the 2022 steps to be taken by the Fed have led to a turnaround in international markets. U.S. consumer inflation accelerated throughout 2021, reaching a 40-year record of 7%. The possibility of an interest rate hike increased after the Fed announced that they would slow down monetary expansion at meetings in the second half of last year. With inflation reaching 7%, it is expected that the bond buying program will end faster than planned and that interest rates will start to increase. It is estimated that the Fed will increase interest rates three times this year, and bringing interest rates to the range of 0.75-1.00, according to the latest survey conducted by Reuters in the week of January 12-19, announced on January 20. Of the 86 economists surveyed, 40 predict four increases during the year. This is not a small percentage. Twothirds of participants expect the Fed’s balance sheet, which reached USD 9tr at the end of the third quarter of this year, to begin to contract.

The Fed did not change the interest rates when it convened on January 26, instead announcing that it would complete its bond purchases and start increasing interest rates in March.